PPP/PFI terminology unravelled [or An idiot's guide to the curious world of Public Private Partnerships]

1
PPP/PFI terminology unravelledor An idiot's
guide to the curious world of Public Private
Partnerships

• Richard Dyton (Simmons Simmons) and Nick
  Hopkins (KPMG)
• 16 January 2007

2
Introduction to the Private Finance Initiative

• Part 1 Some Background
• What is the difference between PPP and PFI?
• What is PFI?
• Terminology Quiz - 1
• Part 2 The Legal Framework
• Basic contractual structure
• Terminology Quiz - 2
• Principal documents
• Treasury guidance
• Part 3 Conclusion

3
Part 1 Some Background

• What is the difference between PPP and PFI?
• What is PFI?
• Terminology Quiz - 1

4
What is the difference between PPP and PFI?

• Is it
• A) Not a lot?
• B) F and I?
• C) That one is a general term for public private
  partnerships, the other a particular type of
  public private partnership?

5
The PPP Range
PPP
Conventional Procurement
Outsourcing FM
Leasing
GOCO
Joint Ventures
Full Privatisation
Strategic Partnering
PFI
6
Headlines Quiz

• These are all headlines
• (A) I.T. Hits The Fan
• (B) Amey Amiss
• (C) The Strange case of the Vanishing
  Hospitals
• (D) The Great PFI Sell-off
• from the Times, The Daily Mirror, Private Eye

7
Terminology Quiz - 1

• What does PIN mean and how does it fit into the
  PFI process?
• A) Personal Identification Number - needed to
  access funding for the PFI
• B) Pesticide Information Network - term only used
  in specialised agricultural PFIs
• C) Prior Information Notice - initial formal
  announcement of the project
• D) Project Identification Number - used to track
  each project throughout its set-up and operation

8
Terminology Quiz - 1

• What is the OJEU?
• A) Official Journal of the European Union -
  publication in which new projects are announced
• B) Orange Juice officially approved by the
  European Union for consumption in the course of
  a PFI
• C) Original Jurisdiction of the European Union -
  regime under which approval for PFI projects
  must be sought

9
Terminology Quiz - 1

• What is the ITN in this context?
• A) Integrated Testing Network - prototype scheme
  used to roll out and test the features of a PFI
  scheme
• B) Invitation to Negotiate - discussions and
  negotiations with co- sponsors, contractors,
  banks and advisors for the preparation of a
  deliverable technical, commercial and financing
  solution
• C) The evening news - used to catch up on the
  latest developments in the scheme
• D) Identification Tasking and Networking -
  allocation of responsibilities between the
  parties at the outset and provision for
  interaction between the parties

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Part 2 The Legal Framework

• Basic contractual structure
• Principal documents
• Treasury Guidance

11
Basic Contractual Structure

• Contractor usually a Special Purpose Vehicle
• Significant up-front investment required
• Equity is usually 10-15 of requirement
• Lenders provide the remaining funding
• Lenders rely solely on the project cashflows for
  debt servicing
• Risk to cashflow is minimised by appropriate
  allocation of risk

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(Basic Contractual Structure)
Shareholders/Sponsors(Shareholders Agreement)
Insurers
Lenders(Inter-Creditor Agreement)
Loan Agreement
Equity
Insurance policies/agreements
Direct Agreement
Direct Agreement
Contractor (SPV)
Construction Contractors
AUTHORITY
Construction Agreement
Concession Agreement (may include Land transfer
agreement or lease)
OperatingAgreement
Suppliers/ Subcontractors
Possibly collateral warranties
Suppliers/ Subcontractors
Operations and maintenance Contractor
13
Terminology Quiz - 2

• What is a Unitary Payment?
• A) One-off payment paid by the public sector for
  the provision of services by the concession
  holder.
• B) Periodic payment paid by the public sector for
  the provision of services by the concession
  holder
• C) Periodic payment paid by the project parties
  to their much valued legal and accounting
  advisors

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Terminology Quiz - 2

• What is Financial Close?
• A) The point at which all the contracts are
  signed by all parties involved in the project
• B) The funders correspondence address
• C) The point at which the final payment is made
  by the public sector to allow operation of the
  project to commence
• D) The point at which the final payment is made
  by the public sector upon termination of the
  project

15
Principal Documents

• Concession Agreement
• Subcontracts
• Direct Agreement
• Loan Agreement
• Insurance
• Shareholders Agreement

16
Principal Documents

• Concession Agreement
• Service requirement
• Payment mechanism
• Acceptance of the Service by the Authority
• Performance regime
• Change mechanisms
• Termination
• Refinancing restrictions on Contractor

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Principal Documents

• Risk allocation
• authority risks
• contractor risks
• operating risks

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(Principal Documents)

• Subcontracts
• May be shareholders of the SPV
• Construction Contractor
• Operation and maintenance contracts
• Authority must carry out due diligence
• Authoritys rights under collateral warranties
  arise on termination of Concession Agreement

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(Principal Documents)

• Direct Agreement
• Main purpose sets out rights and obligations
  following threatened or actual termination of the
  Concession Agreement
• Rights of step-in and liability during step-in
• Rights to replace non-performing Subcontractors
• Application of insurance proceeds to reinstate
  assets on total loss

20
(Principal Documents)

• Loan Agreement
• Restrictions on the Contractor to alter the
  Projects risk profile
• Cashflow requirements and ratio setting
  breaches can trigger loan default
• Term will be shorter than the Concession Agreement

21
Treasury Guidance

• Standardisation of PFI Contracts, version 3
  (April 2004) (SOPC3), as updated
• Guidance for negotiating (and some required
  drafting) the Concession Agreement and Direct
  Agreement
• Promotes consistency of approach and aims to
  reduce negotiating time
• Assumes
• Contractor is an SPV
• there is a construction phase and an operational
  phase
• there is limited recourse debt

22
(Treasury Guidance)

• Standardisation of PFI Contracts (continued)
• SOPC3 must be followed, but
• assumptions above may not apply
• large, complex and/or novel projects may need
  individual treatment
• example drafting is not exhaustive
• MoD standard contract consultation ongoing (
  April 2005)
• Principle of freedom of contract under UK legal
  system has allowed PPP contract structures to be
  developed in deals without requiring contract to
  conform to rigid legal structure
• Document is continually reviewed and amended to
  reflect differences with market practice or
  current legislation

23
Part 3 Conclusion

• The future of PFI

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Future of PFI

• Current projects are still in the early stages of
  operation
• So far the National Audit Office has concluded
  that PFI deals have saved public money, but early
  schools deals proved to be more expensive than
  conventional procurement
• Many governments overseas considering and
  beginning to use PFI
• Considered to be an important UK export

25
PPP/PFI terminology unravelledor An idiot's
guide to the curious world of Public Private
PartnershipsRichard Dyton and Nick Hopkins 16
January 2007